What are the assumptions on which the first fundamental theorem of welfare economics rests?
First Fundamental Theorem of Welfare Economics: Assume that all individuals and firms are self-interested price takers. Then a competitive equilibrium is Pareto optimal.
What are the assumptions of welfare economics?
Welfare economics depends heavily on assumptions regarding the measurability and comparability of human welfare across individuals and the value of other ethical and philosophical ideas about well-being.
What is the fundamental welfare theorem?
-First fundamental theorem of welfare economics (also known as the “Invisible Hand Theorem”): any competitive equilibrium leads to a Pareto efficient allocation of resources. The main idea here is that markets lead to social optimum.
What are key differences between the first and the second fundamental theorems of welfare economics?
The first welfare theorem says a competitive equilibrium is Pareto effi cient: markets can yield effi cient allocations. The second welfare theorem says that any Pareto effi cient allocation can be obtained as an equilibrium provided one makes the ‘right’adjustment to income. Both theorems rule out externalities.
What does it mean by first and second welfare theorem?
ADVERTISEMENTS: The second theorem of welfare economics has certain advantages over first theorem of welfare economics. It explains that if all consumers have convex preferences and all firms have convex production possibility sets then Pareto efficient allocation can be achieved.
What are the conditions of welfare optimum discuss it?
This condition states that the marginal rate of transformation between any factor and any product must be the same for any pair of firms using the factor and producing the product”. It means that the marginal productivity of any factor in producing a particular product must be the same for all the firms.
What are the assumptions of the second welfare theorem?
The Second Theorem can be viewed as a variety of an equilibrium existence theorem with two special properties: i) the equilibrium must occur at a particular resource allocation, and ii) the allocation must be Pareto optimal.
Why is the first fundamental theorem of welfare economics an important result?
Proof of the first fundamental theorem
is Pareto optimal. An equilibrium in this sense either relates to an exchange economy only or presupposes that firms are allocatively and productively efficient, which can be shown to follow from perfectly competitive factor and production markets.